Monte Carlo Method for Pricing of Multi-Asset Rainbow Options

Abstract

When compared to other computational methods, the solution of the system stochastic differential equations in multidimensional case using Monte Carlo method had many useful features. One of them is the ability for boundary value problems to be solved at a single point, if necessary (with associated computational savings), whereas deterministic methods must find the solution at a large number of points simultaneously. This property is especially useful in problems like option pricing, where the value of an option is only required at the time of strike and for the state of the market at that time. We look at a European multi-asset option that is mathematically described by a system of stochastic differential equations in this paper. In this paper we apply well known “Random walk on spheres” (Rwos) algorithm of Monte Carlo method for the numerically evaluation the price of multi-asset rainbow options and compare obtained results with the other known results.